adjust text size:

Trade Secrets

Friends may ask for ‘special consideration’ regarding your charging sales tax. Before you agree, remember: You’ll be the one holding the bag when the tax guys come calling.

Friends may ask for ‘special consideration’ regarding your charging sales tax. Before you agree, remember: You’ll be the one holding the bag when the tax guys come calling.

There’s an old saying: “Hell hath no fury like a woman scorned.” Certainly that was the case for a friend of mine (“Joe”) who had a thriving professional photo lab business. Joe was extremely generous about not charging sales tax to employees, policemen, firemen, amateur photographers and just about anyone who asked. Things went along well until one of his employees, who was cheating on his wife (I’ll call this guy “Lover Boy”), was sued for divorce. To get even with her soon-to-be-ex-husband, the scorned woman reported Joe to the sales tax people, the IRS and just about anyone she could think of. It seems Joe was also paying Lover Boy half his salary under the table. By the time Lover Boy’s wife was done, my friend Joe was fined $10,000 and nearly put out of business.

Another friend, “John,” who runs an auto supply and hardware business, was fined over $6000 because the sales tax people in his state decided he was misusing the tax exemptions his customers presented to him. He had been extremely careful about having a signed tax exemption certificate on file for anyone who claimed he was tax-exempt and had a tax ID number. At some point, a question came up about toilet paper he had sold. When John asked how he was to determine who got a tax exemption for buying toilet paper and who did not, he was told he should have his cashiers ask the wholesale buyer what he or she planned to do with the toilet paper. If the toilet paper was going to be used by the buyer, then it was taxable. If, on the other hand, the toilet paper was going to be resold, then it was tax-exempt.

The tax people went over all his sales receipts for several months to determine which items were taxable even to someone who had a tax-exempt certificate on file. My friend asked the tax people for a list of items that were exempt from sales tax for various types of businesses. They had no such list, they said; they just knew what items were not being resold but rather consumed by the buyer.

I once wound up paying $600 in New York State sales tax fines because I bought a factory service manual from a company in Michigan that did not collect New York State sales tax. It was determined that I should have paid the sales tax on the $36 manual directly to New York State, since the firm I bought the manual from did not collect sales tax. I was fined for 15 years’ worth of sales tax, plus penalties, under the assumption that I had not paid the sales tax on a similar amount for that period of time.

When I balked at paying the $600, my accountant told me to pay it and hope the sales tax auditors would just go away. They didn’t. Three auditors came to my shop every day for three months. It was a nightmare and it all came about because I assumed I was tax-exempt simply because I had a bona fide tax exemption certificate and exemption number.

The auditors have the authority to assume you’re guilty until you’re proven innocent, and in some cases it seems you’re guilty despite the fact that you actually prove innocence. During their “visit” to my shop, the auditors confided in me that they were creating tables they could use for other audits in shops similar to mine.

One of the things they questioned me on repeatedly was my employees’ purchases. They wanted to see invoices for each employee, to see if I had been charging my employees sales tax. In fact, it had long been a bone of contention for several of my employees who did not buy parts from me because they felt they should not have to pay the sales tax. They found they could get a discount from some of my suppliers just by showing up wearing my shop’s uniform. That created another problem because the suppliers made out the invoices they gave my employees in my shop’s name and collected cash from the employee, thinking they were doing me a favor. I finally put a stop to that by sending a letter to all of my suppliers stating that any invoice made out to my shop had to have a purchase order number and that I would stop doing business with them if they used my name on any invoices that did not actually belong to my shop.

Ironically, during their three-month-long visit to my shop, one of the auditors had to have her car towed in. I was standing next to her when the tow truck operator asked her if she needed a bill. I cringed as the guy told her she could avoid the sales tax if she did not need a bill. She eagerly accepted the tax-free charge and never reported him. The rules, it seems, did not apply to her.

In just about any state you are obligated to verify that a person presenting a Resale Certificate is actually entitled to it. It’s often very simple to download a certificate online and fill in the blanks. Before you accept a Resale Certificate from a customer, verify that it’s a valid one. In most states you can call the sales tax agency to check on a certificate’s validity. Keep in mind that not every clergyman who presents a certificate is lawfully entitled to be tax-exempt, just as not every technician who buys parts from you actually resells them as part of his service. If he’s using the parts for his own car, he has to pay you the sales tax.

The Trade Secret is to know that you’re required by law to charge all applicable sales taxes when you sell to the public. Make sure you file and keep track of the sales tax for everything you sell retail, because it may be only a matter of time before you get audited. Aside from the time and torment of having a sales tax audit, you can bet it’s going to cost you money--lots of money. It’s tough to have to say No to a “special” customer who asks you to skip the sales tax, but you’ve got to do it. Feelings may get hurt, but take it as gospel: It’s simply not worth the risk of feeling the wrath of the tax man.